BIM31019 - Tax and accountancy: need to conform to tax law

Profits computed in accordance with UK generally accepted accounting practice form the starting point for the computation of taxable profits. Adjustments to those profits may, however, need to be made to conform to tax law. As well as those required by specific statutory principles adjustments may also be needed to give effect to more general tax principles, best seen as being derived from the need to tax the `full amount' of the profits of the trade, laid down by the courts. See BIM34000+.

In recent years the courts have been increasingly reluctant to override generally accepted commercial accounting practice. See the judgement of the Court of Appeal in Threlfall v Jones [1993] 66TC77, Johnston v Britannia Airways [1994] 67TC99 and, specifically on the timing of receipts, Symons v Lord Llewelyn-Davies’ Personal Representative and Others [1982] 56TC630. In particular:

• they have emphasised that the taxable profits should not be computed on a basis divorced from the principles of commercial accountancy (see the passage at the end of Nolan LJ's judgement in Threlfall v Jones),
• they have been especially unready to override accounting treatment, which in commercial terms is the only acceptable treatment (see the observations of the Master of the Rolls in Threlfall v Jones - 66TC at page 23).

There may be cases where it may appear that the commercial accounts take an unrealistically conservative view. In worthwhile cases of this nature you should seek local accountancy advice at an early stage on the following points:

• whether the accounting treatment is commercially acceptable (if not, the starting point for the tax computation should be accounts drawn up on an acceptable basis, see Threlfall v Jones 66TC77);
• whether there is an alternative commercially acceptable treatment and if so what it is;
• whether, and how, the treatment actually adopted can be justified in terms of `earning' and `matching' or whether, rather, it is only justified by overriding considerations of prudence (see BIM31031);
• how any alternative treatment is to be analysed in terms of these concepts.

If in the light of the accountancy advice you consider that there is a case for arguing that profits should be recognised on a less conservative basis for tax you should put the point to the taxpayer or his agent and debate it accordingly.